$1 bil theory of Relativity

Fund to bankroll dozens of studio films with Citigroup

Entertainment finance company Relativity Media has structured a large-scale financing facility with Citigroup to co-finance as many as 90 studio films with two studios during the next five years. Although the Beverly Hills-based company is keeping the size of the deal and the studios involved under wraps, sources said the pact is in the $1 billion range and that Relativity partner Sony Pictures will be one of the two studios involved.

Sony declined to confirm the deal.

The co-financing package is set up to handle 45 films but is capable of expanding to as many as 90 over five years.

Set up as a wholly owned subsidiary called Relativity Media Holdings I Llc., the large-scale deal financed by Citigroup's corporate and investment banking division suggests that Wall Street's taste for Hollywood product is far from satiated, though investors have been dabbling in the studio business for a few years now.

In fact, each of the major studios likely will establish contracts with more than one financing entity in the coming years as they continue to look for ways to offset risk, a person close to the financing said.

"The difference with this deal is Relativity owns 100% of the equity," said Relativity principal Ryan Kavanaugh, who will co-finance nine to 10 films a year with each of his studio partners. "We don't have third-party hedge funds owning the equity. We essentially live or die by our own successes."

Kavanaugh, who has spent the past month in New York putting the massive deal together, said Relativity will only enter into contracts with studios willing to share access to their film product at an early stage. "Effectively, we need to be shown the product at the same time the studio is making a decision to make a movie, or shortly thereafter," he said. "It's a structure that properly aligns the studio and the investors."

Relativity will not share in the costs of marketing the films, nor will it back development deals set up at the respective studios. It will receive a portion of all the films' revenue throughout their ancillary market streams, as it has in its past deals. Sources said Relativity also will share in the distribution fees earned by the studios — a revenue source from which previous financing entities have been excluded.

Relativity represents the new wave of film financing, whereby Wall Street takes a portfolio approach to a studio, investing debt and equity financing into a slate of studio films. Last year, the financing company invested $600 million in Universal Pictures' slate and $400 million in Sony's slate. It has co-financed such films as Universal's "Smokin' Aces" and Sony's "Catch and Release," both of which opened Friday, along with Sony's 2006 boxoffice hits "The Pursuit of Happyness" and "Talladega Nights: The Ballad of Ricky Bobby," among others.

"We're pleased with our past results and very pleased with our partnerships," Kavanaugh said. "We've done fine, and in some cases we've done very well. But our overall goal is to make sure we refine things in places where we and the studios didn't have the same profit motivation or objectives. There have been ways where the studio can make money where we couldn't."

Similar deals have been struck around town. Paramount Pictures has a slate deal with Merrill Lynch, while the hedge fund vehicle Legendary Pictures has a five-picture, five-year deal with Warner Bros. Pictures. In the case of Legendary, though, Warners chose the majority of the projects, which left Legendary co-financing such 2006 disappointments as "Lady in the Water," "Beerfest" and "The Ant Bully." The fund did have success with its participation in "Batman Begins" and "Superman Returns."

Kavanaugh said that this new round of financing will not be subject to the "cherry-picking" phenomenon that typically goes on with co-financing situations.

"One of our other issues is cherry-picking," Kavanaugh said. "We've seen it many times — where one film in a bad slate can put you out. In our deals, we will not enter into contracts where we do not get to see virtually every film."

Although Kavanaugh might be looking to partner on "virtually every film," that still might not include Sony's juggernaut "Spider-Man" franchise, which will see its third installment bow in the summer. Sources said that while Sony will have to allow greater access to its upcoming slate, there likely will be a restriction against sequels.

The new deal might not have any restrictions on specific genres or types of movies, but there could be some grandfathering of franchises and their sequels to keep them separate, essentially reserving all of "Spider-Man's" upside for the studio alone.

"This deal illustrates that studios are less interested in equity returns than they are in distribution fees," one person familiar with the deal said. "The risk to the studios is (that) in success, you give the store away."